Assets minus liabilities
The balance sheet is built on one relationship: total assets equal total liabilities plus equity. Rearranged, equity is assets minus liabilities, what would remain for the owners if everything were valued as recorded and all debts were paid. BDC describes equity in much the same way, as the difference between assets and liabilities, or what is left over once the business’s activity is done.
Equity can be positive or negative. When liabilities exceed assets, equity is negative, commonly called a deficit. Neither result tells you how much cash the business holds, because assets include equipment, inventory and receivables as well as cash.
Sole proprietor: capital and drawings
For a sole proprietor, equity is usually shown as owner’s capital. Money the owner puts in, plus the profit earned, increases it. Money the owner takes out for personal use, tracked as drawings, reduces it. Drawings are not a business expense and are not paid out as salary, so they do not appear on the income statement.
Mixing personal and business spending makes this account hard to interpret. Use a separate business account and record transfers to yourself as drawings, not as expenses.
Corporation: share capital and retained earnings
A corporation reports its equity as shareholders’ equity. According to BDC, it is made up of common and preferred shares, paid-in capital and retained earnings. Share capital reflects what shareholders paid in. Retained earnings is accumulated profit kept in the company after dividends.
Money moving between a shareholder and the corporation is not automatically equity. Amounts owing to or from a shareholder are tracked separately, and the tax consequences depend on the facts, so review them with your accountant.
An illustrative example
Suppose a business owns $90,000 of assets, made up of cash, receivables and equipment, and owes $55,000 of liabilities, such as supplier balances and a loan. Equity is $35,000. If the business then borrows $10,000, assets and liabilities both rise by $10,000 and equity is unchanged. If it earns $5,000 of profit, equity rises by $5,000.
The figures are illustrative only. In practice, ask whether the balance sheet is reconciled, whether owner withdrawals or shareholder transactions are recorded in the right accounts, and how equity has changed since the last period. Those questions often reveal more than the total.
Sources & editorial notes
Sources checked October 24, 2026. The examples are illustrative and provide general information. Discuss how the guidance applies to your circumstances with your accountant.
Rules and guidance can change. Use the current official source and confirm the treatment for your facts. To flag an error, contact Sora.